Corona Beer Corona Has Become

Corona Beer

Corona has become one of the world's largest brewers through cultivation of special relationships with its distributors, and through building its brand based on simply but highly effective marketing campaigns. The company now faces a highly challenging environment characterized by intense competition, global consolidation and the decline of many of the world's top markets. The company is at a crossroads, having seemingly done all it can do under the strategy of the past twenty years.

The global beer market has been subject in recent years to a number of key trends. Consumption has shifted, with traditionally strong markets in North America and Western Europe declining in consumption and many weaker markets, in Asia and South America, seeing increased consumption. Vintners and distillers are entering into more direct competition with the beer industry, at least at the mainstream level (Modern Brewery Age, 2006). This maturing of the market has lead to another significant trend in the global brewing industry, which is consolidation. Global brewers are seeking, in the face of declining volumes, to improve their profits by way of building greater economies of scale. Since the case was written, Anheuser-Busch and InBev have linked up to create the world's largest brewing company and have seen cost reductions and profit improvements since that merger (Dalton, 2009).

There are significant implications for these trends for Modelo. The Mexican company has expanded thus far on the basis of geographic expansion and a single core product. This method of expansion does not fit with the broader trends in the industry, but it has made Modelo one of the world's largest brewing companies. This fact makes Modelo a good takeover target -- it has a great brand, but is not a true global brewer. Indeed, AB InBev has been rumored to be eyeing Modelo for a takeover bid in 2010 (Jones, 2010).

Modelo does have economies of scale in production, but in the beer business the majority of the product is water, something that does not need to be shipped. As a result, Corona is subject to sky-high shipping costs that are ultimately needless. In the face of declining consumption, Modelo needs to develop a more cost-effective way of doing business in order to maintain profits. This may involve local production, or other tactics that can reduce shipping, if not production, costs, allowing the company to develop something of a cost advantage of many of its competitors in the global premium brand sweepstakes.

Modelo has, however, had success with its current expansion strategy. The company has expanded primarily on the basis of distribution and marketing partnerships with local firms, while retaining the brewing operations in Mexico. Modelo entered the U.S. market by partnering with an appropriate local importer and has largely sought to replicate this model around the world. In the U.S., Modelo gained special advantage by partnering with two distributors, each with half of the country, effectively playing them off against one another in healthy competition.

The next foreign market that Modelo should enter is Malaysia. Corona has almost no market presence in Malaysia, in part due to high alcohol taxes (Hee, 2008), Muslim culture, possible trademark issues (Toyota has a Corolla-esque car called Corona in that market) and limited distribution options. However, distribution is relatively easy since the target market -- expats, tourists and Chinese Malaysians -- tend to be confined to large cities. These also tend to be among the wealthiest Malaysians as well, and more likely to lack the price sensitivity that would otherwise cause Corona to struggle.

To enter the Malaysian market, Modelo will need a local distribution partner. They have few options. The national brewers are Guinness and Carlsberg, of which the latter more directly competes in Corona's segment. However, there are also smaller importers for specialty brews such as Paulaner operating in Malaysia as well. While a smaller company will have more limited distribution, it will distribute specifically to the same types of establishments favored by Corona's target market, and German brews are generally not competing directly with Corona.

AB InBev owns 50% of Modelo at this point. There is the possibility that the company may decide to purchase the remainder of Modelo. If they do not, they are still something of a threat because brands such as Budweiser and Stella Artois, while positioned as mainstream brews in their domestic markets, are generally positioned as premium brands in export markets, the same tactic that Modelo employs for Corona. This puts those brands in direct competition with Modelo. It is interesting to consider that as long as AB InBev owns 50% of Modelo, they are unlikely to compete too vigorously against the Mexican brand lest they devalue it. The main threat, then, is the threat that AB InBev may decide to purchase the remainder of the brand. This could have wide-ranging implications.

One of the ways in which AB InBev could derive synergies from a purchase of Modelo is to offshore some of that beer's production, as the world's largest brewer has excess capacity in a number of different markets. This could result in job loss in Mexico, but it could also compromise the image of the beer. The other main threat is that if AB InBev purchases Modelo, it could allow the Corona brand to wither, or it could promote Corona heavily while allowing the other brands to wither. The latter strategy would be catastrophic in the domestic Mexican market, which provides Modelo with a source of strength in the consistently positive cash flow.

Modelo should respond to these threats by diversifying its business. The company can choose to seek geographic diversification by saturating foreign markets that are presently served only minimally. Another means of diversification would be to expand the product line. This could be done by purchasing liquor brands, and building an international drinks portfolio in that way. This would give Modelo a more diverse source of cash flows to help counter the impacts of the beer industry's maturation and the increase in competitive intensity. These brands may also dissuade buyers, for whom such brands would be a nuisance to be sold off at a loss.